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The following OECD assessment and recommendations summarise chapter 4 of the  Economic Survey of Austria 2005 published 31 May 2005.

What should be done to raise performance in secondary education?

Austria is among the top countries within the OECD with respect to annual expenditures per pupil in primary and secondary schooling. The teacher-to-student ratio is also above average. Despite high input levels the schools’ performance in the OECD PISA exercise for 15-year-old students was only close to the OECD average for most indicators revealing important areas for reform: 

• Schools are relatively tightly regulated and differentiation of students by school types based on specific levels of performance takes place at a relatively young age. Moreover, while some progress has been made in developing quality standards for educational attainment in certain areas, uniform educational standards are absent. Full-day schooling is not the general rule. Nationwide standards for schooling attainment that are regularly evaluated should be introduced, while leaving schools more freedom in determining suitable ways to reach their targets. Full-day schooling should be extended.
• The social background of parents is playing a big role in the choice of schooling, implying considerable scope to improve participation in higher education by disadvantaged social groups and regions, and to raise the performance of the school system with respect to social inclusion. In particular, German language training for children with an immigration background needs to be intensified.
• A high degree of dispersion of competencies across the different layers of government hampers reform of the education system. Financing and spending responsibilities for schools should be aligned at one level of government.

Does recent university reform need to be followed up?

Tertiary education is likewise costly for public budgets, while suffering from long study duration and high drop-out rates. Returns to tertiary education appear to be very low by international comparison, and graduation rates are among the lowest within the OECD despite significant improvement since 1991.

Graduation rates from tertiary education programmes, 2002
%

Note: Rates are estimated as [number of graduates]/[population of typical graduation age].  Tertiary programmes (tertiary-type A) provide qualifications for advanced research or higher skill professions.

New legislation, in effect since January 2004, can be expected to raise the efficiency of the university system in several important respects. Part of university financing will be made performance-related (indicators are yet to be worked out) and tuition fees now accrue to the students' university. Internationally comparable degrees – Bachelor, Master and Doctor – are now compulsory for all new study fields. Granting lifelong tenure for professors has been terminated for new personnel and universities can now freely contract with business. Not all of these features have been fully implemented yet, and special attention should be paid to the following issues:

• The new responsibilities and increased autonomy increases the demand for appropriate management skills at Austria’s tertiary education institutions. Broadening the membership of governing bodies to include external members is a positive step, but it needs to be supported by leadership development and management training for senior managers. The government should monitor whether the universities develop appropriate management capacity in the transition to increased autonomy.
• In linking university funding to indicators, output-related indicators should be preferred over input-related indicators.
• Under the new legislation universities can borrow funds from the credit market if they overdraw their budget. They are also allowed to engage in equity participations in enterprises or found their own business. This could lead to excessive risks. Hence, admissible commercial activities should be narrowly defined. Also, in order to exclude moral hazard on the side of the universities and ensure competitive neutrality, the government should firmly exclude bailing out universities in financial difficulties.
• Tuition fees can play an important role in raising performance-related elements of university finance, but account only for a very small fraction of funding in the current system. The introduction of a small tuition fee in Austria did not have adverse effects on the social composition of students. The impact of tuition fees should be further monitored and evaluated, also in comparison with international experience and consideration should be given to allowing universities to increase the share of fee financing, complemented by an income-contingent loan scheme for students.

Which measures need to be taken to foster innovation, entrepreneurship competition?

Well-functioning markets for equity and venture capital (VC) are indispensable for enterprise establishment and the financing of innovation projects. A large share of private VC investment in Austria is channelled through special VC funds (Mittelstandsfinanzierungsgesellschaft, MFG), which are subject to preferential tax treatment. While this framework might have been initially effective in creating a basic VC market, restrictive quantitative rules for admissible investments are not conducive to increasing the supply of risk capital and hamper investors' ability to diversify risk. This is similarly true also for rules applying to pension and insurance funds.

Venture capital investment by country where it is managed, 2000-03
% of GDP

Restrictive quantitative investment rules should be relaxed. Instead, regulation could follow the “prudent person” principle, which focuses on the overall risk diversification of the portfolio. Also, rather than giving tax preferences to a particular legal form of investment funds, equity and venture capital participations should be made subject to roughly the same tax regime with low taxation of the returns of capital across all types of investors, including business angels and partnerships. A special capital duty on share issue (Gesellschaftssteuer) should be dropped, and preferential treatment of retained profits should be abolished.

Creation of new firms is very important for productivity growth and innovation. Considerable progress has been made in recent years in reducing regulatory overheads hampering the creation and growth of firms. However, there is still much scope for lowering barriers to firm creation. In many trades, notably in the crafts sector, eligibility for setting up a firm is dependent on the owner having obtained a certificate of qualification. The costs of creating a limited liability firm are higher than in other high income countries  

• Certain levies for enterprises are difficult to assess and are associated with considerable fixed costs, making them particularly costly for young or small firms. Examples include local taxes on certain installations, such as advertisement signs or shop portals (Luftsteuer), and the tax on credit contracts (Kreditgebühr), which can fall due a second time if a new owner takes over an enterprise with credit contracts. Thus, further efforts need to be made to reduce the administrative costs of setting up enterprises. This should include revisiting some tax items whose revenues are often relatively small. To the extent that certification is wanted in order to safeguard certain levels of quality, it should pertain to employees rather than owners. 
• Professional services, for example of architects, engineers and accountants, are subject to a complex set of regulations, comprising both statutory provisions and significant elements of self-regulation. There is considerable leeway in professional services for discontinuing some existing provisions or reforming them so as to minimise their distorting effect on competition. For example, recommended fee schedules, issued by the relevant associations, should be prohibited. Exclusive rights granted to liberal professions should be narrowed and compulsory chamber membership for these professions terminated.
• Shop-opening hours regulations have been relegated to the states (Länder). No state has fully exhausted the available scope for liberalisation. The states are encouraged to use the opportunities of the framework legislation more fully.

The previous Economic Survey concluded that much progress had been made in aligning the Austrian competition framework with the mainstream, although the current institutional arrangements appear to be overly complex. Further measures to strengthen law enforcement have been taken in the meantime or are being prepared, such as a better staffing of the Federal Competition Authority (FCA) and the introduction of a leniency programme to strengthen law enforcement. This process should continue. The institutional set-up should be simplified, giving more decision powers to the FCA. In particular, investigative powers should be transferred from the Cartel Court, which does not itself have the resources to conduct in-depth investigations, to the FCA. The introduction of criminal sanctions for hard-core cartels should be considered.

Finally, further progress is required in network industries where regulatory barriers and a high degree of state ownership are an impediment to greater competition. In particular: 

• In the electricity sector, regional market concentration is high and few electricity suppliers make offers outside their regions in which they dominate the market. Retail pricing is not fully transparent, as incumbents often provide information on prices without separating network charges from the price of the electricity. Rules requiring majority government ownership lead to substantial entry barriers. Network access prices should be further reduced and transparent retail electricity prices required. Rules requiring public ownership should be abolished. 
• In the telecommunications sector markets have become more competitive in recent years. Currently decisions by the regulator can be put on hold until a court decision is achieved. This practice invites frivolous appeals which should be stopped by giving the regulator effective means to impose a decision with immediate effect. To make the regulatory framework more credible Telekom Austria should be fully privatised. This would help to ensure that no perceptions of a conflict of interest on the part of the government arise.

How does high seasonal employment slow structural change?

Seasonal employment, notably in tourism and construction, is effectively cross-subsidised via unemployment insurance claims while being out of work. One option to reduce cross-subsidisation would be to link employers’ unemployment insurance contributions to their dismissal record so that firms with lower dismissal rates contribute less (experience rating). At the same time, better activation   also by encouraging the use of flexible working time models   and measures to combat abuse are needed.

Return to the  Economic Survey of Austria 2005 homepage.

A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

Ein Policy Brief auf deutsch kann als pdf Datei heruntergeladen werden. Es enthält die Gesamtbeurteilung und Empfehlungen der OECD auf den Seiten oben.

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